Now that the election is over, the next big item on the government's agenda is dealing with two sets of changes that are scheduled to begin at the start of 2013. The first involves changes to the tax code: The Bush income tax cuts will expire, bringing rates back to where they were during the Clinton years, and so will the payroll tax cuts enacted as part of the 2009 stimulus package and later extended. The second set of changes is the "sequester," under which a series of rather dramatic cuts to government spending will take place. Collectively, these events are being referred to by everybody as the "fiscal cliff," a term that is both misleading and dangerous. Which got me wondering: Where did it come from? And whose fault is it?
I'll keep you in suspense on that for a moment, but here's a good brief explanation from Jonathan Chait about why the term "fiscal cliff" is such a misnomer:
But here is a case where a bad metaphor has caused everybody to think about the matter in exactly the wrong way. When you walk off a cliff, the first step is your last. There is no such thing as falling halfway down a cliff. But the "fiscal cliff" is not a cliff at all. The economic damage is cumulative. It is the opposite of the debt ceiling, when the doomsday clock ticked down to a moment of sudden calamity. A full year of inaction would do a lot of damage, but a week, a month, or even a couple of months would not. The president would have enough control over the mechanics of the budget to delay the effects of higher taxes and spending cuts in order to cushion the blow to the economy. Even if the tax hikes and spending cuts go into effect, any deal that gets signed later could be retroactive. Meanwhile, the Federal Reserve could also take emergency action to keep the recovery afloat.
If you think about the immediate effects of a tax increase, it isn't as though on January 1 IRS agents will show up at your door demanding all the higher taxes you'd pay throughout 2013. Most people would see a small decrease in their paychecks. If you got your check next week and saw it was $20 less than the week before, you wouldn't be happy about it, and you might begin to rethink that iPad mini you've been contemplating, but it isn't as though you'll suddenly stop buying food. As Chait says, the effects will play out over time, yet the term "fiscal cliff" conveys the sense that if we don't fix it, then January 1 is the date of our doom, three seconds of terror followed by a meeting at 32 feet per second with the rocks below, crunching of bones and massive internal bleeding, with only a moment of awareness remaining before we are sucked into the horrific oblivion of death. Fiscally speaking, that is.
So anyway, who's responsible for everyone mistakenly calling this the "fiscal cliff"? The answer is: Federal Reserve Chair Ben Bernanke.
I did a little Lexis-Nexis sleuthing, and it turns out that the term does go back quite a ways; you can find occasional references to a fiscal cliff from years or even decades ago, sometimes concerning the federal budget and sometimes state or local budgets. There are a couple of times in 2011 when someone uses the term in a discussion that includes mention of the expiration of the tax cuts. But the first reference I could find to January 1, 2013, as the "fiscal cliff" because of the combination of the tax cuts expiring and sequestration comes in a hearing of the House Financial Services Committee on February 29, 2012. Testifying before the committee, Bernanke said, "Under current law, on January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases. I hope that Congress will look at that and figure out ways to achieve the same long-run fiscal improvement without having it all happen at one date." Three weeks later, Bernanke appeared before the House Committee on Government Oversight and reiterated that it was his coinage: "If no further action is taken, there'll be what I've termed a fiscal cliff on January 1 of 2013 as a number of tax and other provisions expire, including the Bush tax cuts, the payroll tax, U.I. benefits and at the same time on the spending side if sequestration arising from the failure of the super committee to agree kicks in."
The term soon began to propagate, spreading panic and fear throughout the land. So now you know who's to blame.